Annuity And Sinking Fund - Solution is Just a Click Away

Question: Discuss about the Annuity and Sinking Fund? Answer: The plan is to expand Vinyl Fence Company within the future emulated by the purchase of a new facility of the warehouse for attaining the goal. The insurance company offers two options of the attractive investment i.e. an ordinary annuity and an annuity that is due, which compounds quarterly and pays 8 percent interest on an annual basis within a five year period. The five year budget would incorporate a savings of up to $2500.00 per quarterly basis. It is further realized that there would be a need to replace a fence post i.e. a molding machinery which would be selling for $45000. I have estimated that I will to purchase this machine within 3 years and Im planning on saving for such purchase utilizing a sinking fund compounding on a semiannual basis and hence have a earning of around 12 percent annual rate. Annuities are a series of fixed payments to be paid to a person, business or an individual and a business over a certain time frame. Commonly, these payments are made bi-annually, yearly, quarterly or on a month-to-month basis. Future value of an ordinary annuity: $60,742.50 Future value of annuity due: $65,601.90 The annuity due option would be a better choice, annuity due accumulates interest one more period more than the ordinary annuity, but has the same number of payments (Cleaves, et.al, 2014, p. 504). A sinking fund is a fund that is set up by a party to use for a specific purpose at a future date. In this case the sinking fund is for a fence post molding machine. Calculation of sinking fund: PMT = FV(R/1+R)^n-1) R = 12%/2 = 0.06 periodic interest rate N = 3(2) = 6 FV = 45,000 = 45,000 x (0.06/1+0.06)^6-1) =$6451.32 The longer-term warehouse annuity option chosen gives the business savings of $4859.40 from the other option. Compared to the short-term timeframe ad higher interest rate of the sinking fund, the remaining savings can be channeled to a savings fund in anticipation of a savings fund to be made in the long term from the annuity method chosen. The expansion of a building will mean that more revenue streams will be generated for the company. There is also likely of reaching new markets and diversifying the portfolio of the business. But with the expansion, efficiency and being able to meet the needs of the expanded market reach will be crucial for the thriving of the business. For the moment, the fence post -molding machine is still functional but will reach its useful lifespan in the near future. It will be wise foe the business to focus on what will make it better when it expands like saving for a new machine and acquiring extra warehouse space. In order to prioritize the purchases a plan is important. The business will need to identify the kind of revenues it will expect to generate after expansion to see if it can be able to raise the required payments for the machine can be purchased through help in financing and the extra revenues generated from the expansion of the business subjected towards the semi-annual payments. Reference Cleaves, C, Hobbs, M, Noble, J (2014) Business Math. 10th Ed. Pearson